Adam Samson

I cover a wide range of business news for Yahoo! Finance, from Wall Street, to cyber security and white collar crime.

[valuentumbrian]

5 High-Yielding Strong Dividend Growth Stocks for the Long Haul

We’ve never been more concerned about the financial health of dividend growth investors. Perhaps we’re partly to blame for some of the excitement surrounding the strategy that has taken many corners of the web by storm, but we continue to believe it is important for investors to strive to understand the strategy’s fundamental fallacies, which can’t be talked about enough as a means of helping investors understand key risks.  

For those new to dividend growth investing, part of the strategy centers on identifying stocks that pay dividends that are poised to increase over the long haul, generating in time a yield (a payout) that is a) sufficient on the cost and b) sufficient to generate an adequate income in retirement years. This article cannot possibly capture all of the various ways investors may be using an equity-based income growth strategy, but we think for several, the common tenets below are worth emphasizing.  

An informed investor is a better investor. 

1. The Dividend Is Not A Driver Behind Stock Returns

As we continue to evaluate several studies on dividend growth investing and aggregate data for our white paper on the topic, to be published in coming months, one thing is clear: definitionally, earnings and free cash flow must be the primary drivers behind equity price performance. Though there are many examples that help explain this, we think one example is perhaps only needed to remember the spuriousness of the dividend to total returns.  

What some investors may not remember is that in the mid-1990s, Apple completely eliminated its dividend, and the iPhone giant only recently reestablished the payout earlier this decade. Steve Jobs’ masterpiece has been one of the best performing stocks in the history of equity investing, and it’s simply difficult for us to ignore that the company eliminated its dividend in the past. Such a truism may not help investors that already understand that future earnings and free cash flow are what drives the equity valuation framework (and equity prices), but we think the example may be helpful to others as to why dividends are said to be a symptom (an output) of strong companies and their valuation paradigms—not a driver behind them. 

In our view, it is misleading to say that Apple’s strong stock performance beginning earlier last decade was the direct result of the firm reinstituting a dividend nearly a decade later after the fact. By extension, we think it is equally misleading to say that any company’s strong returns over the past several decades have been a direct result of their dividend policies. The dividend growth investment framework may be suffering from one of the biggest statistically fallacies in investing history: Correlation does not imply causation. Said differently, it is more appropriate to say, in our view, that the strong performance of dividend payers has been (and/or should be) a direct result of expectations of continued strong earnings and free cash flows, not from a steadily-increasing dividend.  

The elimination and re-initiation of a payout has been irrelevant to Apple’s total returns since its inception, as much as the absence of a dividend has been to Berkshire Hathaway’s total returns during the past many decades.  

2. You Already Own Everything That a Company Will Ever Pay You as Future Dividends 

A stock is a claim on a company’s assets, including net cash on the balance sheet, and all of the future earnings and free cash flows associated with such assets. Said differently, shareholders already own today, via the stock price (its intrinsic value), anything that a company will ever pay out as dividends in the future.  

The very idea that a company will generate earnings and free cash flows in the future, for example, is why a company has any value at all today, and dividends are generally paid out as a portion of earnings and free cash flow. The payout of a dividend in this light is not an incremental value-driver to a company’s business; the dividend, as a portion of future earnings and free cash flow, is already captured in the value equation.  

Valuation is and will always be independent of the dividend. Let’s explain this in personal-finance terms.  

Many investors would agree that an individual already owns the cash in his/her personal savings account, much like a shareholder already owns the net cash in a company’s savings account, better known as its balance sheet. If you were to make a withdrawal from your personal savings account, paying yourself in cash what you already own, you are not more or less wealthy because you have done so. You are merely transferring funds from your bank account to yourself, converting the savings to cash in hand.  

This dynamic is similar to what happens when companies pay a dividend to shareholders. Certainly from a conceptual standpoint, most corporates pay out dividends as a portion of earnings and traditional free cash flows, but from a financial standpoint, an entity will always pay a dividend from cash on the balance sheet. To understand why this must be true, one has to look no further than the business models of REITs and MLPs, which consistently pay out dividends/distributions at a level significantly greater than their respective earnings and traditional free cash flows in any given period. Without external capital-market assistance (i.e. the financing section of the cash flow statement), which flows directly to cash on the balance sheet, the lofty dividends and distributions of REITs and MLPs, respectively, wouldn’t be sustainable. 

Net cash on the balance sheet is something investors already own, and such cash is already captured within the valuation framework, which is reflected in the price that shareholders have already paid for an ownership piece in the company (stock). Much like taking cash from your savings doesn’t generate value/wealth to you, a company paying a dividend to shareholders doesn’t (shouldn’t) generate value/wealth to you either, generally and in most cases.  

3. The Total Return of a Company Is Not Bolstered By Dividend Policies  

Investors tend to think of a stock’s total return as a function of both its capital appreciation and dividend yield. For example, some investors think that, because a company raises its dividend, that the total return of the stock would be augmented. This is generally not true. 

When a company pays a dividend, it is actually reducing the cash (or would-be cash) on its balance sheet, thereby reducing the intrinsic worth of the company relative to a situation where it instead would have stored such cash on the balance sheet. All else equal, a company that has $1 billion in net cash on the balance sheet is worth more than a company that has a net debt position. A dividend payment, in reducing balance sheet cash and therefore in reducing the price of the equity, also a) reduces the capital appreciation component of total return as it b) increases the dividend component of total return at the same time.  

A company is not creating more total return by paying a dividend; it is merely shifting a portion of total return from one component to the other, in most cases.

4. Artificial Valuation Paradigms Surrounding Dividends Have Put Dividend Growth Investors at Serious Risk 

The one major and unsettling caveat to the view that a dividend payment does not augment total return is why we’re particularly worried about dividend growth investors in the coming rising interest rate environment.  

The intrinsic value of an entity will always be a function of what it generates as earnings and traditional free cash flows to shareholders–and dividends, being a part of such future streams, will only represent a portion of such a value. In no cases should a company be worth more than what it can generate in future earnings and free cash flows to shareholders on an organic basis. 

However, in the case of most MLPs, such business models–by paying distributions that are significantly greater than earnings and free cash flows–are subject to an unsustainable valuation (pricing) paradigm that is being propped up by external financing endeavors. In such cases, because the valuation paradigm centers more on an artificial and financial-engineered dividend payout–one that is greater than organically-derived future earnings and free cash flows–such companies’ total return dynamics are being fueled by inorganic dividend policies. Such policies inflate both the capital appreciation and dividend components of shares/units, where the dividend/distribution actually starts to drive capital appreciation–and the higher stock prices then help fuel the dividend in a self-reinforcing bubble (often infused via debt issuance).  

Once this artificial valuation paradigm inevitably pops, however, as in what might happen with ongoing contractionary monetary policy or in the case of falling energy-resource prices with respect to most energy MLPs, the total return component for such entities should collapse, in our view. Definitionally, under no case can an entity sustainable pay out more than it generates organically in earnings and free cash flow, without continuous assistance from the external capital markets, which cannot be guaranteed over the long haul. Dividend growth investors are absorbing a tremendous amount of risk heading into a tightening credit environment by investing in companies that pay inorganic dividends. This is our greatest concern with entities that fit the profile of a Kinder Morgan (KMI)–a good and stable business has become a risky and unstable one in light of risk-seeking financing activities. 

5 High-Yielding Strong Dividend Growth Stocks for the Long Haul 

With all of this said, there is nothing wrong with focusing on underpriced, strong companies with solid, cash-rich business models that pay strong and growing dividends, provided that such dividends are generated organically and backed by healthy balance sheets and future streams of free cash flow. Here are five of our favorites that fit such a profile. View Valuentum’s Dividend Growth portfolio here >>

Apple – Fair Value: $142 

What a great example to use to disprove the importance of dividends to total returns, yet it is perhaps one of the strongest dividend payers in the market. With the billions of cash on the balance sheet and the billions it generates in cash flow from operations coupled with the minimal capital outlays, it’s just hard to find another company whose dividend is healthier. Investors are focusing on China as a potential headwind to growth, but we think investors are already discounting such an impact as it relates to Apple. At nearly half the market multiple, we continue to view shares as a bargain. The company yields ~1.8%. 

Cisco – Fair Value: $36 

The communications networking giant may have finally thrown off its association with the dot-com bubble in the late 1990s. Not only does the company have a very healthy balance sheet, but it is simply not getting credit for its earnings stream. Annualizing its quarterly non-GAAP earnings per share of $0.59 during its fiscal fourth period means shares are trading at ~12 times run-rate earnings with a significant net cash position to boot. Big tech has become the land of dividend health, and Cisco is no exception. The company yields ~3%. 

Johnson & Johnson – Fair Value: $108 

Like most multinationals, J&J is experiencing currency headwinds, but we like its fundamental performance. We’re particular fans of the company’s pharmaceutical portfolio, with it having already launched 7 products in the past five years that are expected to generate over $1 billion in annual sales by the end of 2015, but the outlook may be even better. Its robust pipeline includes more than 10 new molecular entities (NMEs) that are expected to be filed by 2019 and may have similar promise. The company has a nice net cash balance to back future free cash flows against an ever-higher payout. Shares yield ~3%. 

Microsoft – Fair Value: $56 

The software giant may be our top dividend growth idea, perhaps neck-and-neck with Apple. Not only has Microsoft turned the corner with respect to fundamental momentum and investor perception, but its balance sheet remains flush with net cash that, like the others on this list, can be used to support an ever-increasing payout that’s already covered with future organic free cash flows. The launch of Windows 10 may provide a short-term boost to results, and we expect innovation under CEO Sayya Nadella to flourish. Shares yield ~2.8%. 

Visa – Fair Value: $75

The credit-card payment processing giant is an under-the-radar dividend growth giant in that its yield isn’t yet high enough to catch income investors’ attention. However, with an operating margin in the mid-60% range, it’s hard not to like the company’s difficult-to-replicate network effect, which only grows stronger as plastic use proliferates. The company’s balance sheet and free cash flow generation may turn heads, but its dividend yield might not, however. At less than 1%, it’s not one for current income, but long-term dividend growth investors could wake up one morning on the announcement Visa has tripled, quadrupled, or even quintupled its dividend.

Image Source: takomabibelot

This article or report and any links within are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of this article and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the article and are subject to change without notice. For more information about Valuentum and the products and services it offers, please contact us at [email protected].

[adamtsamson]

Micron:  ‘We have not received an offer’

A Micron spokesperson late Monday denied a Wall Street Journal report that Tsinghua Unigroup has made a $23 billion buyout offer for the firm. 

“While Micron does not comment on rumors or speculation, we can confirm that we have not received an offer,” spokesperson Daniel Francisco told Yahoo Finance in an email. 

The Journal cited anonymous sources who said China state-owned Tsinghua offered $21 a share to buy the chipmaker, representing a 19.3% premium to Monday’s closing price. 

The purchase would represent the biggest-ever takeover of a U.S. company by a Chinese firm. The move would almost certainly raise the eyebrows of regulators, given the Boise, Idaho-based company is the last remaining major U.S. maker of so-called DRAM chips that are widely used in PCs and other technology.  

(Top image: Reuters)

[adamtsamson]

Comcast customers report DNS issues

Update: A Comcast spokesperson provided the following statement:

"Our engineers have fixed a DNS issue impacting Internet service and some customers' VOD on the West Coast tonight. We know how important it is to people that their service work all the time and are sorry for this interruption. Our engineering team is now working through a root cause analysis to make sure it doesn't happen again."

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Comcast broadband customers on the West Coast reported an issue late Monday relating to a critical bit of technology that facilitates easy access to websites.

The largest U.S. broadband provider apparently ran into a problem with its DNS servers. The technology essentially works as a giant Internet phonebook, allowing users to access websites by name, instead of IP address. For example, DNS servers enable users to enter “apple.com” instead of “17.142.160.59”.

Comcast didn’t immediately respond to a request for comment on the matter.

A couple alternatives to Comcast’s DNS service are Google DNS and OpenDNS.

As of the first quarter, Comcast had 22.37 million high-speed Internet customers.

[adamtsamson]

Bug causes message to crash certain Apple iOS devices

Want to crash your friend’s iPhone? Sending him a message containing a certain string of characters may do just that.

Users posted to Reddit late Tuesday that receiving a specific string caused their iPhones to restart, or prompted individual apps, such as iMessage and Mail, to crash.

Tests by Yahoo Finance on two iPhone 6 devices -- one running iOS 8.2, and the other 8.3 -- confirmed the issue.

An Apple spokesperson couldn’t immediately comment on the matter.

Apple, like other technology companies, is no stranger to software bugs. Indeed, in November, the world’s biggest technology company acknowledged and patched a defect that could have let hackers replace legitimate apps with malicious ones.

Whether or not the latest bug is a nuisance, or something that could trigger a deeper vulnerability, is unknown.

Yahoo Finance’s Rick Newman contributed to this report.

[adamtsamson]

Hedge-fund titans speak out at Sohn Conference

Mala Gaonkar, Lone Pine Capital

Legacy tech may not be sexy, but it could yield solid returns. That’s the investment thesis pitched by Lone Pine Capital’s Mala Gaonkar.

Gaonkar focused on Microsoft (MSFT), the software giant that’s in the midst of a major turnaround effort. She said while some investors tend to worry about the consumer Windows business, it only represents 5% of the company’s top line.

Gaonkar said the company’s enterprise business is key. For one, Microsoft is already a big player in the cloud software space, supplying software like Office and Skype through the cloud. This has helped bolster Microsoft’s hold in the space, and has also cut software piracy since users need to pay for a license to access the software.

More broadly speaking, Gaonkar said she believes these four factors make Microsoft a compelling buy: New strong management, solid revenue growth, operating cost cuts and capital return.

Microsoft’s shares were down marginally in afternoon trading, and are up 4.1% for the year.

Keith Meister of Corvex

“Live Más”

Corvex CIO Keith Meister said Yum Brands (YUM) should spin off its China business to unlock shareholder value in both businesses.

“One type of shareholder is going to not like half the business,” he said of the current arrangement.

Meister said Yum has done a good job recovering from the several food-safety scares in China in recent years. Indeed, according to Corvex research, consumers in China, the world’s second-biggest economy, prefer KFC and Pizza Hut, both Yum units, to rivals McDonald’s (MCD) and Subway.

Corvex has built a massive stake in Yum, leaving the fund as a top-five shareholder in the U.S.-based company.

Meister said a spun off Yum China would benefit from being a fully Chinese company, allowing it to lift the weight of being an American firm operating in China. It would also allow the remaining company to better leverage its assets in the ex-China market.

Meister sees 50%-90% upside in Yum, if it were to make such a move.

Yum shares were up about 1% following Meister’s presentation, and have soared 27% for 2015.

David Einhorn, Greenlight Capital

“Meet the Frackers”

Einhorn is very bearish on several fracking firms. His investment case is basically that several of these companies are spending in “a desperate effort to grow.”

“Frackers drilled holes. Lots and lots of holes,” he said. “As oil prices rose it seemed like the frackers should be drowning in cash. But none of them (developed) excess cash flow” even at $100 a barrel oil.

He used Pioneer Natural Resources (PDX) as a case study in his presentation. He said Greenlight’s estimates show Pioneer is actually generating negative returns to capital spending. That is to say, if the firm keeps spending on drilling, it will actually worsen its position, according to Einhorn.

In the current environment, Einhorn sees Pioneer losing about $12 per each barrel of oil equivalent. And in fact, Pioneer is “dramatically overvalued” even with rosy assumptions, according to Einhorn’s estimates.

The stock was off 3.2% following Einhorn’s presentation, cutting its year-to-date advance to about 11%.

Einhorn also alluded to these players in his presentation, although he didn’t specifically review his estimates: Continental Resources (CLR), Concho Resources (CXO), Whiting Petroleum (WLL) and EOG Resources (EOG).

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A slew of hedge-fund heavyweights are set to offer investment strategies at the Sohn Investment Conference Monday. Among the speakers are Pershing Square’s Bill Ackman, Greenlight Capital’s David Einhorn, Appaloosa Management’s David Tepper and DoubleLine Capital’s Jeffrey Gundlach.

Conference organizers expect attendance of 3,000 people. The organization has raised some $50 million over the years for pediatric cancer research and treatment. The managers that present are also encouraged to donate part of their proceeds from trades to the charity. There’s more on how to donate here.

Yahoo Finance will provide live updates through this blog, and my Twitter handle, @adamsamson.

[adamtsamson]

JPMorgan said to eye date-based woes as Chase.com suffers intermittent outage

JPMorgan's consumer website experienced bouts of sometimes paralyzing sluggishness Friday. But officials are blaming the date, not hackers, for the issues.

The biggest U.S. bank acknowledged at about noon ET many of its customers faced issues logging on to their online accounts. A slew of tweets to Chase's support Twitter handle, @ChaseSupport, lamented issues accessing balance information, making online deposits and so on. Tests by Yahoo Finance at 2 p.m. ET revealed a system that was accessible sometimes, but then yielded errors at other times.

A person with knowledge of the matter said the problem was largely due to a simple conundrum: It's Friday, and also the first day of May. That means paychecks are being issued for many consumers, social security payments are coming in for some, and people are logging on to make an array of payments. The woes were apparently complicated by a batch program that was still being processed from the previous evening.

While the mobile app wasn't initially impacted, it too experienced slowness as customers moved from the PC platform to their smartphones.

The source said the New York-based bank doesn't believe hackers were behind the issues.

JPmorgan shares advanced 26 cents, or 0.43%, to $63.51 in afternoon trading.

Top image: Reuters

[adamtsamson]

Deutsche Bank sees risk of S&P 500 slumping up to 9%

Deutsche Bank warned its clients this week that the S&P 500 could slide in the near-term as strong data have boosted the chance Federal Reserve rate hikes may be "on the horizon."

"We see risk of a near-term 5%-9% dip and reiterate the importance of sector preferences," a team led by David Bianco wrote in a note to clients.

Bianco said strong job growth, coupled with a falling unemployment rate, despite still sluggish economic growth, is creating a situation in which the Fed could boost interest rates from historic lows in the near-term, a move that would send the U.S. dollar shooting even higher.

The U.S. dollar index, which measures the strength of the greenback against a basket of global currencies, hit an 11-and-a-half year high on Tuesday, according to data compiled by FOX Business Network senior editor Charles Brady. The sharp move higher comes on the back of divergence between the Fed, and other central banks like the European Central Bank and Bank of Japan, which are just now beginning to push down harder on the economic accelerator.

A strong dollar is good news for many U.S. consumers, but will be a headwind for multi-national firms that rely on exports. The price of U.S. imports for foreign firms and consumers rises as the dollar strengthens.

At the same time, firms are still adjusting the massive drop in crude oil prices. The benchmark U.S. contract has plunged 52% over the past 12 months, and is down more than 8% for the year, according to data from FactSet Research systems.

Bianco said consumer staples, consumer discretionary and certain transports, like airlines, will benefit from low oil prices. Inversely, energy, capital goods, metals and mining, many chemicals, and utilities are likely to suffer.

Deutsche Bank left its 2015 S&P 500 target at 2150, which is just slightly south of where the broad-market barometer traded in mid-day action Tuesday.

Top image: Reuters

[firstadopter-deactivated2024100]

Interview with Marc Cohodes: Famous short-seller shares his favorite ideas/managers and life lessons

Marc Cohodes and his dog Lucca. Image source: Marc Cohodes

In this exclusive interview Marc Cohodes shares his thoughts on the stock market today, important life lessons, favorite short ideas, the best/worst managers and analysts on Wall Street, and more.

Marc Cohodes was a well-known portfolio manager at Copper River/Rocker Partners for 25 years. The now closed firm was one of the largest short-selling focused hedge funds in its time and managed over $1.5 billion in assets at its peak. The New York Times called him “the highest-profile short-seller on Wall Street.” 

He has been through ups and downs in his career as a short-seller from stellar returns even during the melt-up 1999 year to the difficult events in 2008, where issues with prime brokers led to his firm’s demise. 

Through it all he was widely respected by his peers for the in-depth fundamental research he did on companies, colorful personality, and his penchant to tell the truth. Marc told me this is his first real media interview in 14 years. Thankfully as in the past he does not disappoint and “says it like it is”:

What are your general thoughts on the market and the state of short-selling today?

I am quite bearish right now. I am not a “perma-bear” however, I view myself as a stock picker of mainly shorts and I have more ideas right now than I have capital to invest. I equate easy money (QE) with drugs and getting off of them will be very hard for investors and quite possibly back-breaking. Low rates have forced pundits to tell people “where else can you put your money other than stocks.” My answer is in cash, for at the end of the day you will still have your money. The market has gone up for 6 years and some of the moves are staggering. Kevin O’Leary as a stock market commentator is a sign of something and I am pretty sure it’s not bullish.

Companies are borrowing very cheap money and re-purchasing stock at mind boggling rates. While most view this is bullish/great, I view it as bearish/awful. Buying back stock to boost share price is a fool’s errand, especially on borrowed money. You are supposed to buy low and sell high, this “high wire act” is buy high in hope of sending your stock even higher. If you make your earnings estimates and do the job you are paid to do, your stock will take care of itself. The oil companies’ recent buybacks is an excellent example of what I am speaking of. When oil was high all of the companies along the spectrum were buying back stock. Some actually borrowed money to do this. Now with oil low and the stocks in the tank, most companies have suspended their buybacks. This was a horrible use of their cash and has actually weakened many of those outfits. It seems wrong headed to me that you would buy stock at 100 because it was “cheap” and suspend the very same buyback 50% lower, because “conditions have changed.”

Interest rates are low because the Fed wants companies to re-invest in business, borrow to grow and hire people, that’s what easy money and their programs were designed for. Instead, the various forms of QE have led to rampant market speculation which is causing yet another bubble that will eventually burst. It’s not like we have not seen this before, but people’s memories are very short when it comes to this kind of stuff. It just seems so artificial to me. Stocks should track earnings estimates to a large extent and bad news is brushed off way too easily. It is usually cold in the winter and hot in the summer, so I always snicker at weather being an excuse.  The world is a dangerous place that is quite unpredictable, so it will be fun to watch this play out over the next 6-16 months.

As to the state of short-selling, well it’s essentially extinct as a hedge-fund strategy. As a business model it’s close to impossible. You are a target, people hate you, the cost of doing business is high, losing money is awful and eventually you wear out investors.  Most of my peers have left the business and a few are still giving it a go. I have great respect for the Kingsford Capital guys out here who over the years have done some great work. The negative reinforcement is extreme and although asset managers say they want a short seller in their portfolio, people hate explaining losses and lose faith when all the market does is go up. Losing less than the market (when it’s going up) is the sign of a good short seller (generating Alpha), but losing money is a terrible feeling and eventually wears people out. I say that short sellers age in dog years (I think the ratio is 1 to 7). Long investors can do it till they are in their 90’s, but shorts sellers on a professional level only have a shelf life into their 40’s.  The few genetic mutants like Jim Chanos and Carruthers have no age limit, have prospered and have my respect.

There is some hope with a new crowd of “Young Studs” who blog and do outstanding research.  Some of the names that these cats have uncovered have been great and I applaud their effort and research.  It gives me hope for the future. True frauds have been exposed and the stocks have reacted accordingly. I hope the regulators pay attention to this, as it is fertile ground for both enforcement and criminal actions against these companies. My only worry is that the “shoot the messenger without paying attention to the message” syndrome takes exposed companies should come clean and make things right at their company rather than blame short sellers. When negative information does reach the market place and the stock reacts negatively it’s usually time to blame the shorts. The most recent example of this is Lumber Liquidators.

If I were in the Chairman’s shoes or whoever was on 60 Minutes and they came to me with the issues, I would say that if your report is true, we really fucked it up. We are sorry and will make it right. This is not what we stand for and we were cheated by the Chinese (or whatever happened). You establish a reserve and apologize to people and try and move forward. You own your mistakes. Instead these chuckleheads blame the short-sellers? You’re kidding me. This is the exact behavior that I am talking about. Just terrible.

I have no position in LL but tip my hat to the people who did the leg work in figuring this out. I also applaud 60 Minutes, who really messed it up when they took the side of Biovail against the shorts many years ago. It shows how ass backwards peoples’ attitudes are with short sellers, will it change? Probably never but it’s a huge flaw in the system. This forum is not long enough to discuss what is really at work, but maybe one day I write a book, who knows?

What are the most important lessons you have learned in investing and in life?

That’s a great question.  I have always tried to surround myself with people who are smarter than me. I was an ok student at best, not a Harvard or Stanford guy and always try to “listen” instead of hear. I always look for places I could be wrong and while not paranoid; I know people would love nothing more than to run me over. You never know what you don’t know so that’s something to always remember. I have learned a lot of lessons the hard way, but eventually I do learn. Shorting stocks to me is like a cattle drive, I am confident that I will be right and make money, but in getting the cows from Omaha  to Fort Worth, I will probably end up with some arrows in my ass. I just want to make sure they are not in my back. So that means you can be dead right on the fundamentals, but if your timing is wrong, you are wrong and better adjust. That took me a while to learn, but it’s important. Everyday is also fresh and you have to ask yourself if you came to the situation fresh today would you still be in the position and what would the right size be. I have always taken big positions, I think owning or shorting more than 30 stocks is a waste of time. If you believe in something, go for it. If not, spend the time to find it, or sit in cash or gold. It’s ok, there is always tomorrow.

It’s also important in life and in investing that you can’t be right and righteous at the same time. I try and invest and lead life with that in mind. I am also driven; you have to be if you ever want to be great.  Investing at the hedge fund level is all in. There are no time outs. There are no breaks. The good ones, and there are a few, take it personally, I know I did. I wouldn’t want my money with anyone who did not. Investing, if you’re serious is not a dress rehearsal, it’s for real. It’s remarkable how firms have dummied up the business and encourage people to play every concept known to man including having Joe Six-pack play with foreign exchange. The Swiss Franc moves in the market and firms go out of business in a day. Huh? This should be a wake-up call and bears careful watching.

I think motivation is important in life and with investing, to always do better, to always try harder. My son (Max) has some physical limitations (I hate using the word disabled), and he never lets that get him down. Watching him grow up and get through life has motivated me to no end. He has never once complained, or pouted, he goes along with his day, and life with a smile and passion that makes me smile. Recently Alex Berenson dedicated his latest book, 12 Days to Max, so I am not the only one affected by him. It’s a great book and anyone reading this should go buy it.

Finally failure and how you deal with it is very important. Everyone can be a good winner and winning is easy and fun. It is dealing with adversity that truly defines you. I call it “letting go of the rope”. I do not let go of the rope as much as at times I would like to, it’s just not in my DNA.

What is your current favorite long idea and why?

I do not own any stocks right now. I can’t find anything I like. I do have an idea that makes a lot of sense to me.

I think if Coca Cola wants to invest in the coffee industry, that they should buy Starbucks. It makes all the sense in the world, while letting Howard Schultz run the combined company. Coke has a huge problem and that is soda is the new cigarettes. They are scrambling to find something new. The guy who runs Coke to me is a fool and has made one mistake after another. If you want to be in coffee, Starbucks is your answer. Howard Schultz may have a huge ego, but the guy is a winner and is the only guy with the drive to really turn Coke around. It would be an end to end beverage company. So if I was an investment banker, I would push Coke to do this. Just my 2 cents

What is your current favorite short idea and why?

Favorite short, is like favorite kids, but will touch on a few. These are my opinions and just that so I hope no one gets worked up. In no great order of “favorites”:

I think GMCR is a great short. Now if Coke buys them it will not be and that’s the risk. I don’t think Coke is stupid enough to spend 25 billion plus for a “packager” of coffee. That’s all GMCR truly is.  The excitement over their cold product to me is misplaced, which is probably worth 50 points in the stock alone. Sodastream (which I was short) showed you how small that market is and single serve is already available in soda, it’s called a CAN.

Their coffee business which used to grow at 100+% , now grows in the mid-single digit range and this is after introducing their “new” brewing system. Other than their first machine, all new products here have been a failure. The fellow who runs the company has folks in a trance as to their future, but has missed just about every forward guidance number he has put out. I think their accounting is very aggressive and think they will continue to miss earnings and sales estimates. When at a recent conference the CEO mentioned that GMCR is a “technology company”. Cut me a break, hot water goes over coffee grounds in a plastic container. The machine breaks a lot and the product tastes terrible, that’s technology? Really?

GMCR issued stock to Coke at $75/share and fits my “mindless” buyback criteria with them buying back stock here at $125 ish. They actually are in a net debt position. Earnings estimates keep getting cut and the company keeps coming up with excuses. Finally the product tastes terrible. If you want hot black water with a bit of a jolt great, but if you really want great coffee get a hold of my pals at Four Barrel Coffee in San Francisco @fourbarrel and enjoy it.

NuSkin (NUS) is a MLM (multilevel marketing company) based in Utah (not my favorite place) that has a bad balance sheet and business model. They had a horrible financial year last year and the stock got hit. They bought back stock in the 100-120 range and were violating bank covenants 9 months later when the stock was 40. They continue to lower guidance and I am just not a believer here. Their gross margins and inventory have me scratching my head and think relationship deserves regulatory scrutiny. Let’s just leave it at that.

The Canadian real estate market is between a rock and a hard place and their housing market makes 2006-2008 here look like Sunday School. I think Home Capital Group is a great short up there (HCG). They are a subprime lender and sell at 2.2x book. I don’t know how they sell above book at all. They have missed their last 2 quarters and I believe that credit will begin to hit them. Canada’s macro is horrible and to say that there is a housing bubble is an understatement. People admit it’s a bubble, but think it’s too soon to pop. Its amazing how smart everyone is at playing musical chairs, dragging the game out as long as possible will which make the fall that much harder. I know I run the risk of being early, but given their recent quarterly misses under ideal business conditions makes me think that we are close to a significant break at HCG.

I have far more detail and analysis than what I have mentioned on these 3 names, but it’s a place for people to begin to look. As I always say, do not try this at home. Shorting stocks is dangerous and a good way to lose a lot of money, but I sure as heck would never own any of these names.

I am short a few frauds that I do not want to discuss on this forum. I have shared my findings with the government, so time will tell there.

Why did you decide to become a chicken farmer and how does it compare to Wall Street?

My grandfather, who raised me, was a part-time farmer and I always wanted to have some form of farm. Alder Lane (www.alderlanefarm.com) is more of a horse training facility and I mess around with eggs and fruit. I have 200 fruit trees ranging from apricot to apple and everything in between. I think I am around 500 birds and people seem like my eggs. They are available at Bi Rite Market in the city and they do not last on the shelves. I also share them with Una Pizza Napoletana who makes a special pizza with them on Saturday. It’s worth going by there to have Anthony’s pizza.

Farming is a difficult business and gladly I am not counting on its income to live. How does it compare to Wall Street?  Well the neat thing about chickens, is that there is a pecking order and they are very funny to watch.  I name birds after people I both like and can’t stand. There is a rowdy strain of roosters that I named the “Antars” after Sam . When they misbehave they become Enchiladas or Mole. That’s where it differs from Wall Street, troublemakers and law breakers are allowed to exist and succeed on Wall Street, where at Alder Lane they become dinner.

What short investment are you most proud of and why? AremisSoft? Lernout & Hauspie? Iomega?

What I am most proud of and where did I/we make the most money are different topics. The best stories were the least profitable shorts which is kind of ironic. A battle, if you will is never something you look for, but also nothing I have tended to run away from, especially rascals. I am proud of the work that was done on Lernout for sure, those guys were complete money laundering criminals and was a fight of all fights. Proud of that one “Hell yes!”, but I would say the heat we took on Novastar and the huge loss that we had and reversed was something for the ages. We lost many investors over that one and not small ones either, but kept telling folks we had’em and in the end we did. Fighting Irwin Jacobs on AremisSoft was epic, but he did apologize for the grief he put us through after it went to zero and I would consider him and I friends. Golden Valley Microwave, Michael Foods, Avid, Tonka, TCBY, Old Country Buffets, AAII Pharma ,Media Vision, Creative Labs, ACAS, AMRE, Krispy Kreme also come to mind. Heck, I might have to write all of this down one day. It was a lot of fun.

Which portfolio managers do you respect?

I respect and admire very few investors. I think most of the well-known managers are full of hot air and also blow with the wind. I also view most as bull market players. The greatest long investor of my generation (I am 54) without a doubt is Jeff Ubben of Valuact.

Jeff is not only brilliant, but he takes big positions, thinks things through, is honest, ethical, dogged and wonderful to be with. He does not get enough credit for what he has done over the years and I can’t say enough good things about him. I admire, respect and look up to him.

The best long/short manager is David Einhorn. He has a lot of the same traits as Ubben,  but can also figure out shorts. He takes real positions and he has the courage of his convictions. When I speak with him, I have to be on my A game because he is quick, asks the right questions and doesn’t mess around.

The best short seller I have ever known is Dave Scially. He used to work at Kingsford, but has two young kids and a wonderful wife now and it’s a much better way for him to spend his time. Dave and I fried a lot of fish together and worked on a lot of names and I do miss that part of the business.

People who I would invest with include Chris Hansen at Valiant in the city and Peter Park at Park West in Marin. They do an outstanding job.

The best 3 sell-side analysts I have ever worked with were; Mike Krensavage at Raymond James, he now runs a hedge fund that has knocked the cover off of the ball. He made a short call on a complete fraud we were involved in called AAII Pharma, took enormous heat from the company and clients and the stock went to ZERO. One of the best calls ever.

Mark Astrachan at Stifel is also outstanding. His long call over the years on Monster Beverage is truly epic and he never ever blinked on that stock. We were short it and he got us to cover about 7,000% ago and will never forget that.

Finally Cory Armand at Rice Voelker in New Orleans. The guy is just bad ass. He has a great nose for both long and shorts and goes the extra mile to figure it out. Astrachan and Armand are still on the sell-side and Krensaveage is just an All Star now.

I also want to mention the 3 worst sell-side analysts. For these guys in MY OPINION are awful and do not want people to think that I have become soft and gushy.

Rob Stone at Cowen touted both Media Vision, Lernout and Hauspie as Strong Buys, banked them both and had to have known they were total frauds. How he works in the investment business is beyond me.

Heath Terry for his calls on Take-Two back when the company was cited and halted by the SEC for accounting fraud were just memorable. The stuff he used to write and say about TTWO was stuff nightmares are made of.

And a tie for 3rd is between Tim Ramey and Jeff Van Rhee. Ramey for his calls on MLM’s of late and Van Rhee for his ‘blind” support no matter what the facts of an Atlanta based software company.

Last question, is it true that you are a Sith Lord?

"The Sith Lord” in Byrne’s mind was with Milken or Stevie Cohen. I was the only person mentioned in that awesome flow chart Byrne posted by last name only. I was "Cohodes" while everyone was first and last name. I was sort of looked at the way music folks look at "The artist known as Prince." Crazy times for sure.

Thank you for your time Marc.

Marc Cohodes can be reach on Twitter: @alderlaneeggs

Send news and tips to: taekim(at)yahoo-inc(dot)com Follow me on Twitter: @firstadopter

[adamtsamson]

How big banks fared in the Fed's simulated economic storm

All 31 banks that were subjected to the Federal Reserve's annual stress test managed to keep their tier one common ratio above the 5% threshold under the central bank's "severely adverse" scenario. Some lenders came out with much stronger marks than others -- indeed, it's worth noting Zions Bancorporation only narrowly passed this section after failing it last year.

Here's a look at the results:

[adamtsamson]

Buffett's words of wisdom

Berkshire Hathaway CEO Warren Buffett's sprawling 50th anniversary essay is a worthy read for anyone interested in business management or investing. It's filled with intriguing anecdotes of success and failure, coupled with nuggets of wisdom from the Oracle of Omaha's decades of experience. 

You can read the note in its entirety by click here. Buffett's review starts on page 24, while Vice Chairman Charlie Munger's analysis begins on page 39.

I've also listed some of my favorite portions below. I would love to hear which sections you found to be the most interesting, so feel free to email me at [email protected], or tweet @adamsamson. 

--

The blueprint [Munger] gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.

--

Even with Charlie’s blueprint, I have made plenty of mistakes since Waumbec. The most gruesome wasDexter Shoe. When we purchased the company in 1993, it had a terrific record and in no way looked to me like acigar butt. Its competitive strengths, however, were soon to evaporate because of foreign competition. And I simply didn’t see that coming. 

Consequently, Berkshire paid $433 million for Dexter and, rather promptly, its value went to zero. GAAP accounting, however, doesn’t come close to recording the magnitude of my error. The fact is that I gave Berkshire stock to the sellers of Dexter rather than cash, and the shares I used for the purchase are now worth about $5.7 billion. As a financial disaster, this one deserves a spot in the Guinness Book of World Records.

--

Post mortems of acquisitions, in which reality is honestly compared to the original projections, are rare in American boardrooms. They should instead be standard practice.

--

Periodically, financial markets will become divorced from reality – you can count on that. More Jimmy Lings will appear. They will look and sound authoritative (1). The press will hang on their every word. Bankers will fight for their business. What they are saying will recently have “worked.” Their early followers will be feeling very clever. Our suggestion: Whatever their line, never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is --- zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices.

(1)  See Buffett's suggested reading one the once high-flying exec.

--

I believe the chance of any event causing Berkshire to experience financial problems is essentially zero. We will always be prepared for the thousand-year flood; in fact, if it occurs we will be selling life jackets to the unprepared. --

At a healthy business, cash is sometimes thought of as something to be minimized – as an unproductive asset that acts as a drag on such markers as return on equity. Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.

--

The reason for our conservatism, which may impress some people as extreme, is that it is entirely predictable that people will occasionally panic, but not at all predictable when this will happen. Though practically all days are relatively uneventful, tomorrow is always uncertain. (I felt no special apprehension on December 6, 1941 or September 10, 2001.) And if you can’t predict what tomorrow will bring, you must be prepared for whatever it does.

--

Fortunately, the structure our future CEOs will need to be successful is firmly in place. The extraordinary delegation of authority now existing at Berkshire is the ideal antidote to bureaucracy. In an operating sense, Berkshire is not a giant company but rather a collection of large companies. At headquarters, we have never had a committee nor have we ever required our subsidiaries to submit budgets (though many use them as an important internal tool). We don’t have a legal office nor departments that other companies take for granted: human relations, public relations, investor relations, strategy, acquisitions, you name it. 

We do, of course, have an active audit function; no sense being a dammed fool. To an unusual degree, however, we trust our managers to run their operations with a keen sense of stewardship. After all, they were doing exactly that before we acquired their businesses. With only occasional exceptions, furthermore, our trust produces better results than would be achieved by streams of directives, endless reviews and layers of bureaucracy. Charlie and I try to interact with our managers in a manner consistent with what we would wish for, if the positions were reversed.

--

Both the board and I believe we now have the right person to succeed me as CEO – a successor ready to assume the job the day after I die or step down. In certain important respects, this person will do a better job than I am doing.

Top image: Reuters

[adamtsamson]

Barclays: Don’t fear the liftoff

Given Wall Street’s obsession with every comment FederalReserve Chairwoman Janet Yellen makes, it’s not a stretch to think the central bank’s first rate hike will be a defining moment for the nearly six-year old bull market. But analysts at Barclays say you shouldn’t worry … too much.

“There is no need to fear rate hikes. That is the conclusion we draw from the strong historical performance of equities at the start of rate-hike cycles,” Jonathan Glionna, the investment bank’s head of U.S. equity strategy, wrote in a note to clients this week.

Glionna’s team reviewed a dozen rate-hike cycles since 1958, and came to the conclusion that generally speaking, U.S. equities rise heading into the first rate hike, then stall for about three months before resuming their “robust” advance.

In fact, over the last six cycles, equities have advanced by 9% on average in the 12 months following the first rate hike. To be sure, though, the data aren’t all bright and rosy. In two of six cycles between 1958-1977, stocks tumbled by 13% on average in the year following the first hike. 

Another problem this time around is that corporate earnings growth is much slower. During past cycles, large-cap earnings were expanding at a year-over-year rate of 18% when the Fed decided to boost interest rates – that compares to roughly 3% S&P 500 earnings growth forecast this year, according to Barclays’s research. Given rate hikes generally compress earnings growth, “it is unlikely that the S&P 500 will perform as well as it has at the beginning of prior rate hike cycles.”

Indeed, the bank’s 2100 S&P 500 price target for 2015 is roughly in-line with where the broad-market index is already trading.

Cyclical stocks could be energized by liftoff

Barclays’s analysis suggests cyclical stocks tend to perform best on the heels of the Fed’s first rate hike, while defensive shares tend to fall. Energy, industrials and materials shares tend to perform well.  Conversely, health-care and consumer staples tend to “stand out” as poor performers. 

"While the first rate hike is often considered an indication of the end of the cycle, the performance of sectors suggests that is not the case," Glionna wrote.

"Rather, the strong performance of energy, industrials, and materials against the poor performance of health-care and staples indicates that investors should view the first rate hike as a signal that growth is strong, and they should remain overweight cyclical sectors for a bit longer."

Out of 30 stocks Barclays recommends as possible strong performers following liftoff are these blue chips: Caterpillar, DuPont, ExxonMobil and Chevron.

Top image: Reuters

[adamtsamson]

Full statement: Eurozone, Greece strike four-month debt accord

Finance ministers representing the 19-member currency bloc have forged an agreement that gives Greece a four-month extension on its bailout, contingent on certain factors. The move gives the embattled country and its creditors breathing room to craft a longer-term package.

Here is the full Eurogroup statement:

The Eurogroup reiterates its appreciation for the remarkable adjustment efforts undertaken by Greece and the Greek people over the last years. During the last few weeks, we have, together with the institutions, engaged in an intensive and constructive dialogue with the new Greek authorities and reached common ground today.

The Eurogroup notes, in the framework of the existing arrangement, the request from the Greek authorities for an extension of the Master Financial Assistance Facility Agreement (MFFA), which is underpinned by a set of commitments. The purpose of the extension is the successful completion of the review on the basis of the conditions in the current arrangement, making best use of the given flexibility which will be considered jointly with the Greek authorities and the institutions. This extension would also bridge the time for discussions on a possible follow-up arrangement between the Eurogroup, the institutions and Greece.

The Greek authorities will present a first list of reform measures, based on the current arrangement, by the end of Monday February 23. The institutions will provide a first view whether this is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review. This list will be further specified and then agreed with the institutions by the end of April.  

Only approval of the conclusion of the review of the extended arrangement by the institutions in turn will allow for any disbursement of the outstanding tranche of the current EFSF programme and the transfer of the 2014 SMP profits. Both are again subject to approval by the Eurogroup.

In view of the assessment of the institutions the Eurogroup agrees that the funds, so far available in the HFSF buffer, should be held by the EFSF, free of third party rights for the duration of the MFFA extension. The funds continue to be available for the duration of the MFFA extension and can only be used for bank recapitalisation and resolution costs. They will only be released on request by the ECB/SSM.

In this light, we welcome the commitment by the Greek authorities to work in close agreement with European and international institutions and partners. Against this background we recall the independence of the European Central Bank. We also agreed that the IMF would continue to play its role.

The Greek authorities have expressed their strong commitment to a broader and deeper structural reform process aimed at durably improving growth and employment prospects, ensuring stability and resilience of the financial sector and enhancing social fairness. The authorities commit to implementing long overdue reforms to tackle corruption and tax evasion, and improving the efficiency of the public sector. In this context, the Greek authorities undertake to make best use of the continued provision of technical assistance.

The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely.

The Greek authorities have also committed to ensure the appropriate primary fiscal surpluses or financing proceeds required to guarantee debt sustainability in line with the November 2012 Eurogroup statement. The institutions will, for the 2015 primary surplus target, take the economic circumstances in 2015 into account.

In light of these commitments, we welcome that in a number of areas the Greek policy priorities can contribute to a strengthening and better implementation of the current arrangement. The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.

On the basis of the request, the commitments by the Greek authorities, the advice of the institutions, and today's agreement, we will launch the national procedures with a view to reaching a final decision on the extension of the current EFSF Master Financial Assistance Facility Agreement for up to four months by the EFSF Board of Directors. We also invite the institutions and the Greek authorities to resume immediately the work that would allow the successful conclusion of the review.

We remain committed to provide adequate support to Greece until it has regained full market access as long as it honours its commitments within the agreed framework.

Top image: Reuters

[adamtsamson]

U.S. warns on Lenovo Superfish woes ... and other updates

Update: Lenovo has released an automated tool for removing Superfish.

Underscoring the severity of the Lenovo Superfish problem, the U.S. Computer Emergency Readiness Team (US-CERT) issued a warning Friday, saying, "Exploitation of this vulnerability could allow a remote attacker to read all encrypted web browser traffic (HTTPS), successfully impersonate (spoof) any website, or perform other attacks on the affected system."

I've received a few questions about which machines may be affected by the debacle, and how to get rid of the issue.

Lenovo has provided an automated tool for killing Superfish, along with step-by-step manual instructions. And this site claims it will determine whether your computer is affected in the first place. Additionally, Neowin, a tech news website, is reporting Microsoft Windows Defender is now removing the software, to some extent. You can read the full write-up here. 

Meanwhile, Lenovo has provided the following list of machines Superfish may have come per-installed on:

G Series: G410, G510, G710, G40-70, G50-70, G40-30, G50-30, G40-45, G50-45 U Series: U330P, U430P, U330Touch, U430Touch, U530Touch Y Series: Y430P, Y40-70, Y50-70 Z Series: Z40-75, Z50-75, Z40-70, Z50-70 S Series: S310, S410, S40-70, S415, S415Touch, S20-30, S20-30Touch Flex Series: Flex2 14D, Flex2 15D, Flex2 14, Flex2 15, Flex2 14(BTM), Flex2 15(BTM), Flex 10 MIIX Series: MIIX2-8, MIIX2-10, MIIX2-11 YOGA Series: YOGA2Pro-13, YOGA2-13, YOGA2-11BTM, YOGA2-11HSW E Series: E10-30

[adamtsamson]

how would you delete the "superfish software if you have it ?.. Thanks

Good question! PC World did a nice write-up on how to remove the software:

http://www.pcworld.com/article/2886278/how-to-remove-the-dangerous-superfish-adware-presintalled-on-lenovo-pcs.html

And you can use this website to see if it's installed:

https://filippo.io/Badfish/

Disclaimer: I haven't personally tested the method, so I can't endorse either tool, but they seem to work.

[adamtsamson]

Lenovo panned over controversial software installation

**Update: **Lenovo has updated the time-frame in which it shipped machines with the software to September-December, from October-December. 

Lenovo is facing a storm of criticism from cyber-security professionals over software it pre-installed on some computers last year.

The software, called Superfish, is designed to provide users with alternate options for items they’re looking to purchase. Essentially, according to Lenovo, the world’s biggest PC maker, it performs contextual and image searches to determine which item the individual is looking at, and provides alternative purchasing options.

On paper, it seems perhaps convenient, but in practice, many security professionals say it opens severe security vulnerabilities in the way it functions.

The software, which China-based Lenovo said it installed on some consumer-level PCs during a window between September-December last year, utilizes a trusted root certificate authority, basically a pass that tells the end-user's computer it is communicating securely. By creating its own certificates, researchers say, Superfish is opening a hole in what should be secure communications.

Lenovo “ships laptops that break all HTTPS browsing, with an ad-insertion program called Superfish,” Chris Palmer, a software security engineer at Google, working on the search giant’s Chrome web browser, said in a Twitter post. In a separate post, he pointed to a screenshot of Superfish assigning a certificate for bankofamerica.com.

Echoing Palmer, Kenneth White, a security researcher focusing on networks and global systems, said in an e-mail, "By configuring and running software in this way, Lenovo has given Superfish (and now, any potentially hostile third party) the ability to silently decrypt and eavesdrop on any HTTPS website."

White added that could include a large swath of websites, from banks, to e-mail services, and medical providers.

A Lenovo spokesperson said the firm “thoroughly investigated this technology and [did] not find any evidence to substantiate security concerns.” The spokesperson also noted the software doesn’t monitor or track user information and said every session is independent. The user was given a choice to opt-out, the spokesperson said.

Still, based on negative user feedback, the firm tells Yahoo Finance it stopped installing the software in January, and “completely disabled server side interactions … so that the product is no longer active.” It doesn’t have plans to begin pre-installing it again. 

The spokesperson didn’t immediately comment on exactly how many computers the software is installed on. During the fourth quarter of 2014, Lenovo shipped just north of 16 million PCs, according to IDC. That includes enterprise and consumer PCs, so it’s difficult to ascertain the exact number of installations.

Top image source: Reuters

[adamtsamson]

Protégé Partners: These factors ‘wreaked havoc’ in our bet against Buffett

Warren Buffett is trouncing Protégé Partners in a wager over whether hedge-fund management can provide better returns than a passive strategy. Now, Protégé and its co-founder Ted Seides are seeking vindication.

The duo laid out their opposing theses in 2008: Buffett said investors are best served over long time horizons with investing in low-cost index funds that track the broad markets as opposed to paying substantial management fees, active trading costs and so on. Protégé Partners, which invests in small hedge funds, countered that a more aggressive, and expensive, strategy would pay off.  

To raise the stakes, Buffett and New York-based Protégé agreed the loser would give a charity of the winner’s choice $1 million based on whose strategy provided better returns over the course of a decade. Through a serendipitous chain of financial events, the winning charity actually stands to glean closer to $1.68 million.

To say the Oracle of Omaha is winning the bet puts it lightly. Buffett’s cumulative return in the Vanguard 500 Index Fund Admiral Shares (VFIAX) is 63.5% over seven years, or 7.3% per year (the figures don’t sum due to compounding). Meanwhile, Protégé’s pick of five anonymous funds of hedge funds has returned a relatively paltry 19.6%, or 2.6% per year (the numbers are subject to change because the 2014 figures are still trickling in).

Santoli: Cry me a river that leads to Omaha

The lackluster performance isn’t limited to Protégé’s picks – the once vaunted hedge fund industry at large has broadly lagged its more mainstream, and less costly, peers since the bull market began in March 2009. 

Protégé defended its business in a note written by Seides Thursday on the Yahoo Finance Contributors Network, saying, “We believe that those extrapolating the recent past to call for the demise of the hedge fund industry are probably a bit extreme.”

Blame it on … the Fed, S&P 500?

The firm, which was founded in 2002 by Jeffrey Tarrant and Seides, said management and performance fees accounted for 24.4% of the underperformance – representing just north of half of the overall gap of 43.9%. The other 19.5% came from two more surprising sources.

“We believe the headwinds faced by hedge funds have resulted from a combination of the substantial outperformance of the S&P 500 over global equity markets and the adverse impact of the Fed’s Zero Interest Rate Policy ... on hedge funds relative to other investment vehicles,” Protégé said in the note.

“Together these factors wreaked havoc on a bet whose prospects we initially felt quite confident.”

Digging into the details, Protégé said the S&P 500, an index of large capitalization U.S. companies, isn’t a fair benchmark for hedge funds that tend to diversify globally and have a bias toward small cap. stocks, calling it an “apples-to-oranges comparison.” Indeed, Protégé said its performance has essentially matched the MSCI ACWI, a much broader index that tracks roughly 85% of global investable equities.

Protégé’s funds also took on about half the risk of the Vanguard fund, which only wins if the market goes up. Unfortunately for Protégé, its funds were only about 40%-60% net long during a period in which stocks have been on the rise (save for 2008).

Protégé blames the rest of its plight on the Federal Reserve, which has kept short-term interest rates near zero since 2008 in its bid counter the worst financial crisis since the Great Depression. The central bank has also unleashed numerous rounds of bond purchases to put pressure on longer-term rates.

“The absolute level of interest rates has a direct effect on hedge fund returns,” Protégé said, adding, “we believe the Fed has had a dramatic impact on lowering hedge fund returns over the last six years.”

Vanguard’s fund, by its very nature, is always fully invested in equities. Not so for hedge funds. In fact, Protégé said funds generally keep between 0% and 90% of their net assets in cash, depending on the strategy they’re utilizing. With extremely low short-term rates, the funds don’t earn much on their cash holdings, giving the index fund yet another leg up.

Hedge funds also frequently employ a strategy called “shorting” stocks, a bet the issue will decline in value. In order to make that trade, the fund must borrow shares from what’s called a beneficial owner with the help of an investment bank. The beneficial owner receives cash collateral from the borrower, for which it pays the borrower interest.

In order to make a profit, the owner reinvests the cash at a higher interest rate. Low short-term rates, plus increased scrutiny, have left lenders in a position where they end up making less profit on the transaction. To bolster their own returns, Protégé said, the lender is now paying the borrower lower rates on collateral. That trend, along with others in the securities lending space, has been painful for many funds.

Overall, the expected shortfall given the wonky market environment and fees over the period was 70.6%, according to Protégé’s calculation. That makes the actual 43.9% underperformance a bit more palatable, and leaves the residual return a tad higher than the management fees.

“If the bet continues on its course, there’s always the next ten years,” Protégé said in conclusion. “We happen to know firsthand that Warren couldn’t be more excited to watch that period unfold.”

Top Image: Reuters

[adamtsamson]

Chick-fil-A probing 'unusual' payment-card activity

Chick-fil-A said Wednesday it is investigating "potential unusual activity involving payment cards used at a few of our restaurants."

The fast-food chain said it received a report late on December 19 from payment industry contacts indicating there had been "suspicious" payment activity originating from cards used at "a few" of its locations. Georgia-based Chick-fil-A stopped short of saying it experienced a data breach, noting in a statement that it is "working diligently to understand all of the facts."

"It would be premature for us to comment further given the pending investigation, but we will share additional facts as we are able to do so," the statement said.

Chick-fil-A said it has contacted federal law enforcement authorities over the matter, and is working with leading information security firms and contacts within the payment industry.

For now, the company is advising concerned customers to "regularly monitor card accounts and to quickly report suspicious activity to your card issuers." The firm said customers can also call 855-398-6439 for additional information.

The issues at the chain that raked in $5 billion in system-wide sales in 2013 come on the back of a flurry of breaches at major companies and government entities across the U.S.